Fed tapers again with $US10bn cut

Outgoing US Federal Reserve chairman Ben Bernanke and his successor Janet Yellen. The Federal Reserve Open Market Committee announced a further $US10 billion cut to its monthly bond-buying program on Thursday.
Photo: Bloomberg

The US Federal Reserve has made a further $US10 billion cut to its massive bond-buying program, tapering monthly purchases to $US65 billion in the second such move in as many months.

US equities extended losses following the announcement, which was in line with expectations, with the Dow down 1.31 per cent for the day to 15719.43 and the S&P 500 off 1.14 per cent at 1772 in late afternoon trading.

The SPI was down as much as 70 points immediately after the Fed statement, before recovering slightly to be down 65 points at 5109 shortly before 7.30am AEDT, setting the scene for a rough day for the Australian sharemarket.

The Aussie dollar was trading lower at US87.28¢ following the Fed statement’s release, having risen as high as $US88.13¢ on Wednesday evening.

“Labor market indicators were mixed but on balance showed further improvement. The unemployment rate declined but remains elevated. Household spending and business fixed investment advanced more quickly in recent months, while the recovery in the housing sector slowed somewhat."

The Fed also noted that while inflation is running below longer-run objectives, expectations for inflation are stable.

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“The Committee sees the risks to the outlook for the economy and the labour market as having become more nearly balanced," the FOMC said.

“The Committee recognises that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term."

The economic environment led the Fed to pare its monthly purchases of agency mortgage-backed securities to a pace of $US30 billion per month, down from $US35 billion. The pace of purchases of longer-term Treasury securities will fall to $US35 billion per month, from $US40 billion.

The FOMC voted unanimously for the decision, which comes before Federal Reserve chairman Ben Bernanke hands over to his successor Janet Yellen on Friday.

‘As expected’

“This was pretty much as expected," Rockwell Securities chief market analyst Wayne Kaufman told Reuters. “Ten billion more in tapering, but the Fed is still doing tremendous amounts of asset purchasing."

The Fed’s decision closely follows a tumultuous few days for financial markets as the drying up of so-called hot money flows into emerging markets spurred fears over the health of a number of economies, including Turkey, Argentina and India.

The Turkish central bank’s rates decision, which lifted the overnight lending rate from 7.75 per cent to 12 per cent, was seen as a test of its willingness to act on domestic economic issues, as the organisation has been perceived as being susceptible to political pressure.

The ructions in emerging markets has sparked some debate over the role of Fed tapering in the turbulence that has rattled investors in recent days.

But on Wednesday, IMF financial counsellor and director of the fund’s capital markets department Jose Vinals sought to put distance between Federal Reserve policy and the troubles experienced by emerging markets.

“This is not a panic situation,’’ he said, describing the turbulence as ‘‘a combination of idiosyncratic factors’’ across the countries affected, unlike broad-based capital outflows earlier this year that were sparked by the expected tightening of US monetary policy by the Fed.